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Essel: Outclassing competition

Nov 27, 2000

Essel Packaging was recently in the news when it announced the merger with Propack, thus creating the world’s largest laminated tube company (capacity – 2 bn tubes per annum). Though there is no company, which comes close to the Essel in terms of size in India, we thought it would be meaningful to compare it Shree Rama Multi-Tech (SRMT), the latest entrant in this segment. In terms of product profile, Essel is the more focused of the two, concentrating solely on laminated tubes. But Shree Rama also has a presence in printed products like labels and stickers. It also makes speciality packaging and plastic products. Shree Rama’s laminated tube making capacity is a puny 4,135 tubes per annum compared with 2 bn tubes of Essel Propack combine.

In terms of presence too, Essel far outshines Shree Rama. Essel is an Indian company with a global presence. It is dominant in China, has presence in Europe, Africa and the Middle East, whereas Shree Rama is as yet, India centric.

FY00 (Rs m) SRMT Essel
Laminated tubes capacity (thnos) 4 1,312,000
Turnover 2,046 2,484
Net profit 448 366
Operating profit margin(%) 45.0% 31.5%
Net profit margin (%) 21.9% 14.8%
3 year CAGR in turnover 47.2% 17.5%
3 year CAGR in profits 41.1% 18.7%
No. of Shares (eoy) 26.5 15.2
Earnings per share* 16.9 24.1
Current P/e ratio 4.3 20.2

A look at numbers of both companies reveals a very interesting picture. While there is no doubt that Essel is a giant in terms of laminated tube making capacity, there is not much difference between the turnover of the two companies. In fact, Shree Rama’s net profit is higher than Essel’s in FY00. It also earns higher margins than Essel. Why is it so? This is because unlike Essel, which focuses purely on laminated tubes, Shree Rama’s revenues come from four business streams viz. labels, tarpaulins, tubes and trading. In real terms, tubes contributed only 35% (Rs 710 m) to Shree Rama’s FY00 turnover.

At first glance, when we compare the valuations (P/e’s) of the two companies, it does look like that Shree Rama is undervalued. But Essel commands higher valuations for its focused management, its global scale of operations and future growth prospects. Essel’s risk profile is much safer than Shree Rama’s. There is also fear that as a result of the Essel Propack merger, Essel will be able to bring down costs and in effect give competitors like Shree Rama a run for their money.

From the current perspective and its past records however, it must be said that Shree Rama has done exceptionally well. But will it be able to maintain such scorching growth rates? This is the question that is probably worrying the investors’.

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